GREENVILLE, Wis., Nov. 19, 2009 (GLOBE NEWSWIRE) -- School Specialty (Nasdaq:SCHS) today reported fiscal 2010 second quarter and year-to-date financial results that demonstrate solid progress in reducing costs, and continuing strong free cash flow. Revenue for the second quarter of fiscal 2010 declined to $346.1 million, down 11.3 percent from $390.3 million in the prior year's second quarter. Excluding the expected decline in science curriculum adoption revenue of $10 million, quarterly revenue declined 9.0 percent. Second quarter net income was $29.6 million as compared to $30.4 million last year. Second quarter diluted earnings per share declined to $1.57, or 2.5 percent, as compared to $1.61 in last year's second quarter.

Despite the volume decline, the company's successful restructuring and fixed-cost reductions resulted in a 130 basis-point operating margin increase in the second quarter, and a 50 basis-point improvement year to date. Free cash flow improved by $24.3 million, or over 200 percent, for the first six months of the year. Low capital spending requirements, inventory controls, and improved days sales outstanding for accounts receivable all contributed to the strong cash flow performance. The company used much of the cash to strengthen its balance sheet, reducing total debt by $115 million over the past 12 months, which includes the pay-off of an accounts receivable securitization facility in last year's fourth quarter.

"The busy season results came in as we expected," said Chief Executive Officer David J. Vander Zanden. "Our previously announced $20 million cost-reduction program has grown to $25 million, and that additional success at controlling costs was seen in our operating margin improvement. Schools continue to struggle with their budget challenges. While volume in consumable and curriculum products, excluding adoptions, has been only modestly below the prior year, sales of furniture and equipment have been significantly lower because those purchases are more easily delayed. In this challenging environment, our associates have worked extremely hard over the past year at expense control, and completing our business and functional consolidations within Educational Resources. We believe those structural changes and fixed-cost reductions have also prepared us for future growth as the economy recovers and education spending returns to more normal levels."

School Specialty also announced today that it has completed the previously announced divestiture of its retail trade book business, School Specialty Publishing, to Carson-Dellosa Publishing, LLC, a newly-formed business entity. Under the agreement, School Specialty combined its publishing unit assets with those of Cookie Jar Education, Inc. and received a minority equity interest in Carson-Dellosa Publishing. Future results from the business combination will be reported as an investment under the equity method of accounting, beginning in the third quarter of fiscal 2010.

Second Quarter Financial Results

* Revenue for the second quarter was $346.1 million, compared with
$390.3 million in fiscal 2009's second quarter. The decrease was
primarily due to reductions in spending by many school districts,
and an expected $10 million decline in science adoption revenue
compared to the same period last year. The furniture and
equipment category incurred the largest revenue reduction, while
curriculum-based and consumable products saw more modest
mid-single-digit declines.
* Gross profit was $143.1 million compared with $159.1 million in
last year's second quarter. Consolidated gross margin improved
50 basis points to 41.3 percent, despite an unfavorable product mix
this year. The improvement was primarily due to product pricing
and costing initiatives.
* Selling, general and administrative (SG&A) expenses declined
$13.7 million to $86.4 million compared with the prior year's
$100.1 million. Cost reductions resulting from operational
consolidations, improved supply chain management and various
expense controls reduced SG&A as a percent of revenue in the
second quarter to 25.0 percent, compared with the prior year's
25.6 percent.
* Operating income for the second quarter was $56.7 million
compared with $59.0 million for the same period last year.
The company's gross margin improvement and cost-reduction
efforts helped drive a 130 basis-point improvement in operating
margin, reaching 16.4 percent.
* Second quarter net interest expense and other declined $1.2
million to $7.7 million from $8.9 million in last year's
second quarter. This decline was attributable to a reduction
in debt balances of over $115 million, inclusive of the
elimination of an accounts receivable securitization program in
fiscal 2009. Both periods included non-cash interest expense of
$3.2 million and $3.0 million, respectively, as a result of the
company's adoption of FASB ASC Topic 470-20 regarding new
accounting rules for convertible debt.
* Net income in the second quarter of the current year was $29.6
million ($1.57 per diluted share) compared with last year's
second quarter net income of $30.4 million ($1.61 per diluted
share). Both periods included non-cash charges related to
convertible debt accounting, which reduced second quarter diluted
EPS by $0.10 in both fiscal 2010 and fiscal 2009.

Six-Month Financial Results

* Revenue for the first half of fiscal 2010 was $676.5 million
compared with $769.1 million in the first half of last year.
The reduction is primarily due to spending reductions by schools,
and an expected $21 million decline in state science adoption
revenue.
* Gross profit for the first six months of the fiscal year was
$285.9 million compared with $323.1 million in the first six
months of last year. Gross margin improved 30 basis points to
42.3 percent, despite this year's lower-margin product mix. The
improvement was due to product pricing and successful vendor
costing initiatives.
* SG&A expenses declined $26.4 million in the first six months of
this year to $174.7 million compared with $201.1 million in the
first six months of fiscal 2009. As a percent of sales,
year-to-date SG&A declined 30 basis points to 25.8 percent.
* Operating income for the first half of fiscal 2010 was $111.2
million, compared with operating income of $122.0 million in the
same period last year. Operating margin increased 50 basis
points to 16.4 percent.
* Year-to-date net interest expense and other declined $1.9 million
to $15.3 million from $17.2 million in the first six months of
fiscal 2009. This decline was attributable to a reduction in
debt balances of approximately $115 million, inclusive of the
elimination of an accounts receivable securitization program in
fiscal 2009. Both periods included non-cash interest expense of
$6.4 million and $5.9 million, respectively, as a result of the
company's adoption of the new accounting rules for convertible
debt.
* Net income for the first six months of fiscal 2010 was $58.0
million ($3.07 per diluted share) compared with $63.8 million
($3.36 per diluted share) for the first six months of fiscal
2009. Both periods included non-cash charges related to
convertible debt accounting, which reduced six-month diluted EPS
by $0.20 this year and $0.19 in fiscal 2009.

Outlook

School Specialty is maintaining its fiscal 2010 guidance for revenue, earnings per share and free cash flow. The company expects revenue to range from $915 million to $940 million which includes a projected $22 million decline in curriculum adoption revenue and an approximately $8 million decline due to the net effect of the divestiture of School Specialty Publishing and the acquisition of AutoSkill International, Inc. The free cash flow range of $70 million to $80 million ($3.71 to $4.24 per diluted share) excludes the $11.7 million purchase price of the AutoSkill acquisition announced last quarter. In addition, the company has updated the following modeling expectations:

* Gross margin is now expected to grow 100 to 130 basis points
over fiscal 2009 versus prior guidance of plus 60 to 70 basis
points.
* SG&A is expected to be 33.4 to 33.8 percent of revenue.
* One-time integration costs from acquisition and divestiture
activity are projected at $.06 to $.08 per fully diluted share.

Finally, the projected diluted earnings per share range of $1.40 to $1.60 is unchanged. These figures include a $0.42 non-cash charge for adoption of the new convertible debt accounting rules, and one-time integration costs mentioned above. Excluding the impact of the convertible debt accounting change and the transaction integration costs, the diluted earnings per share range is $1.88 to $2.10. Had the new convertible debt accounting rules been in effect last year, fiscal 2009's diluted earnings per share would have been $1.44, compared with the reported $1.83.

Conference Call

School Specialty will host a conference call to discuss its fiscal 2010 second quarter financial results. The conference call begins today, November 19, at 10:00 a.m. Central (11:00 a.m. Eastern). The call will be simultaneously broadcast in the Investor Information section of the School Specialty web site at www.schoolspecialty.com, and a replay of the call will be available.

About School Specialty, Inc.

School Specialty is a leading education company that provides innovative and proprietary products, programs and services to help educators engage and inspire students of all ages and abilities to learn. The company designs, develops, and provides preK-12 educators with the latest and very best curriculum, supplemental learning resources, and school supplies. Working in collaboration with educators, School Specialty reaches beyond the scope of textbooks to help teachers, guidance counselors and school administrators ensure that every student reaches his or her full potential.

Any statements made in this press release about future results of operations, expectations, plans or prospects, including but not limited to statements included under the heading "Outlook," constitute forward-looking statements. Forward-looking statements also include those preceded or followed by the words "anticipates," "believes," "could," "estimates," "expects," "intends," "may," "should," "plans," "targets" and/or similar expressions. These forward-looking statements are based on School Specialty's current estimates and assumptions and, as such, involve uncertainty and risk. Forward-looking statements are not guarantees of future performance, and actual results may differ materially from those contemplated by the forward-looking statements because of a number of factors, including the factors described in Item 1A of School Specialty's Annual Report on Form 10-K for the fiscal year ended April 25, 2009, which factors are incorporated herein by reference. Except to the extent required under the federal securities laws, School Specialty does not intend to update or revise the forward-looking statements.